Why ecommerce will morph into local commerce in India

As ecommerce platforms push ahead in their quest for profitability, they will converge with startups building out the local delivery model.

It is no secret that e-retail in India has been growing at a dramatic pace. It is expected to reach $22 billion in three years (from a negligible size five years back) after attracting billions of dollars in venture investment. Several unicorns have been created in this space. More than 40 million users already shop online in the country, and this number is expected to rise rapidly towards the 100 million mark.

The classic ecommerce model entails a small number of large efficient warehouses built across the country, coupled with a well-oiled logistics network that can deliver merchandise to consumers anywhere within a few days. However, this model has three basic constraints that will lead to its evolution:

First, the big centralised warehouse ecommerce model is economically sub-optimal in India. Shipping one package across the country and into smaller towns costs significantly more on a unit basis than ‘caching’ goods closer to where the demand is. This issue is more pronounced in India than it is in many other markets – the ASPs in India are typically low, while the logistics (shipping, warehousing) costs are not proportionately low. For example, for a generic retailer, the Average Order Value in India may be Rs 1,000 ($16) vs $50 in the US (i.e. a third) for a retailer with a similar category mix, but the unit logistics cost at scale may only be 40 per cent lower in India. Return shipping and logistics increases unit costs further. The marketplace model with platform fulfillment could add in yet another leg of shipping. Shipping and logistics can cost 8-10 per cent of the gross merchandise value for many e-retailers and marketplaces, and this cost item appropriates much of the gross margin/platform fee for several e-retail categories. In fact, classic ecommerce may not have the structural cost advantage over brick and mortar retailers that it has enjoyed in many other markets. Charging separately for delivery on a widespread basis will always be hard in a highly competitive market like India. In order to drive towards profitability and better unit economics, ecommerce companies will need to find disruptive ways to optimise their shipping and logistics expenses.